Property transfer rules

Clauses 149 to 152

Issue:   Definition of “settlement of relationship property”

Submission

(New Zealand Law Society)

The definition of “settlement of relationship property” in proposed section FB 1B defines the transactions that are eligible for the concessionary rollover relief under subpart FB.  The proposed amendment to the definition broadens the range of transactions that are eligible for the rollover relief.

The Commentary on the bill explains that the reference to “between parties” is to be deleted so that transfers of property between one of the parties to the agreement and a third party (such as a family trust) are included.  However, the proposed definition of “settlement of relationship property” goes further than that, in that neither the transferor nor the transferee need to be parties to the relationship property agreement.  The consequence of this approach appears to be that transactions between two trusts (such as a resettlement) under a relationship property agreement will be subject to the concessionary treatment in subpart FB.

The concessionary treatment should extend to such situations (as was the case prior to the Income Tax Act 2007), but we are concerned that Inland Revenue may “read down” the new definition, given that the Commentary on the bill implies that the transferor must be a party to the relationship property agreement.

Officials should clarify that the change in the meaning of “settlement of relationship property” means that neither the transferor nor the transferee need to be a party to the relationship property agreement and, as such, subpart FB will apply to the resettlement of trust property under a relationship property agreement.

Comment

Officials agree that the proposed amendment to the definition of “settlement of relationship property” is intended to broaden the category of transactions that are eligible for rollover relief, including a resettlement of trust property.  However, officials have concerns about the breadth of the submitter’s proposal to extend the definition.  Specifically, officials consider that it may not be appropriate to provide rollover relief for transactions between a party to the relationship property agreement and a third party.  Officials consider that the proposed amendment should be limited to transactions between the parties to the relationship property agreement or associated persons.

Recommendation

That the submission be accepted in part, by clarifying the proposed amendment to the definition of “settlement of relationship property” should limit the rollover relief to transactions between the parties to the relationship property agreement and associated persons.


Issue:   Application date of definition of “settlement of relationship property”

Submission

(New Zealand Law Society)

The proposed change to the definition of “settlement of relationship property” will affect whether the transferor or the transferee bears the income tax liability arising from the transfer of property (such as depreciable property) under a relationship property agreement.  These tax implications would (or at least should) have been taken into account by the parties in determining a fair split of relationship property.  If the change to the definition of “settlement of relationship property” is enacted with retroactive effect, this could have a significant impact on the financial position of parties who have settled relationship property in good faith, before the date of enactment.

Comment

Officials agree with the submission that a retroactive change could affect the financial positions of people who have previously settled relationship property.  Officials propose, therefore, that the application date for the changes to the definition of “settlement of relationship property” should be the date of enactment of this bill.

Recommendation

That the submission be accepted.


Issue:   Tax treatment of transfers of relationship property

Submission

(Matter raised by officials)

Section FB 1C is intended to be a rollover relief provision to deal with settlements of relationship property not otherwise dealt with by a specific provision in subpart FB.  Section FB 1C ensures:

  • the transferor has no tax consequences on disposal; and
  • the transferee acquires not only the property, but all the characteristics of the transferor with respect to that property – for example, date of acquisition, cost at acquisition, and intention of acquisition.

There is arguably a mismatch between proposed section FB 1C(1) (which suggests that a transferor is liable for any tax arising on transfer of the property to the transferee) and proposed section FB 1C(2) (which states that a transferor is not liable for a tax obligation that would otherwise arise as a result of disposing of the property).

Comment

Officials consider section FB 1C should be clarified so, for tax purposes, the disposal and acquisition under the relationship property agreement is disregarded.  The amendment should also clarify that the transferor is liable for any tax obligations that arise before the transfer under the relationship property agreement.

Recommendation

That the submission be accepted.


Issue:   Distribution by a trustee under an arrangement

Submission

(Matter raised by officials)

Under sections FC 1(1)(c) and FC 2(1), a distribution of property from a trustee to a beneficiary of the trust is deemed to be a disposal and acquisition at market value.  In some circumstances this is an inappropriate outcome.  The proposed amendment to section FC 1(1)(c) provides that a distribution will not be deemed to be at market value when it is part of an arrangement under which a beneficiary pays an amount for the property.  The exception should only apply where the beneficiary pays an arm’s length amount of money.

Comment

Limiting the exception to situations when an arm’s length amount has been paid will better align with the general approach that deems the disposal to be at market value.  When a beneficiary pays an amount that is not at arm’s length then it seems appropriate to deem the disposal and acquisition to be at market value.

Recommendation

That the submission be accepted.